April 2025 Outlook: Calamos International Small Cap Growth Fund

Nick Niziolek, CFA, Dennis Cogan, CFA, Paul Ryndak, CFA and Kyle Ruge, CFA

Key Points:

• As fiscal spending shifts from the US to abroad, we believe investors are becoming excited about the potential for a pick-up in growth outside the US. A sideways-to-downward move in the US dollar further supports the case for international equities.
• We believe international small caps should do particularly well in this environment.
• The fund remains diversified across a range of cyclical and secular themes, and we are excited that the breadth of opportunities has expanded across the global market, as previously out-of-favor areas of the markets enjoy renewed interest.
• We believe the opportunity set within Europe continues to evolve and expand, and we’ve increased our exposure to the region, identifying great companies exposed to emerging cyclical tailwinds.

During the first quarter of 2025, global markets sharply and quickly reflected the possible commencement of an inflection in investor sentiment to favor ex-US markets over the long-preferred US market. After years of US and foreign investors building up exposure to the US market, tariff and fiscal policy developments may be catalysts for capital migration out of the US and into ex-US markets at the margin.

US policies—from both DOGE and tariff perspectives—have introduced sentiment uncertainty into the US economic outlook, potentially indicating a crack in the US-exceptionalism trade. In contrast, in Europe, policymakers have initiated efforts toward increased defense and fiscal spending impulses, in concert with a stronger focus on investment in innovation throughout the continent. Additionally, we continue to see increased policy efforts toward consumer support in China and a refreshed willingness from leadership to support the country’s most innovative companies. As fiscal spending shifts from the US to abroad, we believe investors are becoming excited about the potential for a pick-up in growth outside the US. (For more, see our recent post, “Overseas Investment Opportunities: US Policy Shifts Awaken the Sleeping Giants.”)

We welcome this environment. Our time-tested investment process is designed to quickly identify companies across an expansive universe that can benefit most from inflections. We then promptly size up our portfolio exposures to these opportunities. The fund remains diversified across a range of cyclical and secular themes, and we are excited that the breadth of opportunities has expanded across the global market, as previously out-of-favor areas of the markets enjoy renewed interest.

In this commentary, we examine some of these dynamics in more detail and provide insight into some of the ways we have positioned the fund to benefit from these changing dynamics.

International small caps. As we enter a more attractive market environment for international equities, we believe international small caps should do particularly well.

As markets recover and earnings inflect (as we are seeing early signs of in Europe), many small-cap companies could benefit most from an economic rebound, given that smaller companies often have more exposure to local economic drivers than their larger global peers. Extensive research and active management will be key to identifying which small-cap companies will benefit to a greater degree from these growth inflections. Given that international small caps are not as well covered in the investment community, we believe our time-tested process and experience investing in international small caps across portfolios will remain an important differentiator. (For more, see our paper, “An Experienced Approach Targets International Small Cap Opportunity.”)

Finally, we believe valuations for international small caps are still attractive relative to US small caps. As shown below, international small caps are trading between one and two standard deviations below the historical average discount to US small caps.

Attractive Valuations in International Small Cap Stocks

Past performance is no guarantee of future results. Source: Bloomberg. The lower the value, the wider the discount of forward P/Es of international small cap stocks compared to US small cap stocks.

Europe. While there have been extended periods when US equities outperformed their European counterparts or vice versa, the current cycle has been exceptional in terms of the length (17 years) and the magnitude of US equity outperformance.

Relative Performance of European Equities Compared to US Equities since 1970 (in USD)

Past performance is no guarantee of future results. Source: Kepler Cheuvreux, “Keep calm and carry on,” March 17, 2025, using data from Datastream and Kepler Cheuveurx. Performance represented by MSCI indices.

For a long while, we have been on the lookout for a catalyst to arrest this trend, and several catalysts have converged over the past few months that give us confidence that the year-to-date counter-trend rally in European equities is sustainable and may even be the beginning of a new cycle.

As we wrote in our recent post, “Overseas Investment Opportunities: US Policy Shifts Awaken the Sleeping Giants,” “America First” policies ultimately may be the catalyst for overseas equity outperformance, as countries realize that they may no longer be able to rely on the US for export-led economic growth and security. Germany recently passed infrastructure and defense spending plans that we estimate can bring 1%–2% to GDP annually over the next few years and pull the German economy out of recession. As we wrote in our recent post, “In Defense of Higher Spending: Geopolitics Creates Secular Opportunities,” we expect NATO countries will increase defense spending to 3%–5% of GDP. This commitment boosts the growth prospects of many companies, and we are finding many new opportunities for the fund.

Meanwhile, we anticipate Germany’s infrastructure proposal will further widen this opportunity set. We believe transportation, power, energy, education, rails, and ports are all compelling areas of investment focus, and we have identified a range of European industrials and materials companies that we expect to benefit from these new plans.

As these stimulus packages work their way through the economy, European banks are positioned to benefit from increased loan growth and a more favorable regulatory environment. (For more, see our recent post, “European Banks: Hard Work Pays Off.”)

US Dollar. The move in the US dollar has historically been a telling indicator of the relative performance prospects of international versus US stocks. An extended period of a sideways-to-weaker dollar has historically supported higher relative returns for international stocks, as it traditionally encourages global allocation and capital flows into ex-US developed and emerging markets.

During the first quarter, softer US economic data, tariff concerns, and fiscal uncertainty contrasted strikingly with major international economies enacting economic stimulus policies. Against this backdrop, the US dollar began a steady decline lower from a starting valuation position, arguably at its most extended point over the past 50+ years (see figure below).

The US dollar recently traded over two standard deviations above the average versus other currencies

Source: CLSA, “Top Dollar” February 20, 2025, using CLSA, Oxford Economics. Past performance is no guarantee of future results. PPP = purchasing power parity, which measures the price of a basket of goods in different currencies.

We may not be witnessing a “weak dollar” but, for the first time in a very long time, a “strengthening euro.” Regardless, the change contributed to decisive international equity markets’ outperformance during the quarter. (For more, see our post, “Why the Dollar Inflection Should Not Be Ignored.”)

Major global assets tend not to move in a straight line in one direction. That said, we believe the dollar’s trajectory during the first quarter could be a preview of a sustained tendency for a sideways-to-downward US dollar.